Dividend paying stocks like Acorn International, Inc. (NYSE:ATV) tend to be popular with investors, and for good reason – some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.
So you may wish to consider our analysis of Acorn International’s financial health, here.
With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Acorn International is a new dividend aristocrat in the making. We’d agree the yield does look enticing. The company also bought back stock during the year, equivalent to approximately 4.5% of the company’s market capitalisation at the time. Some simple research can reduce the risk of buying Acorn International for its dividend – read on to learn more.
Click the interactive chart for our full dividend analysis
Payout ratios
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Acorn International paid out 12% of its profit as dividends, over the trailing twelve month period. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.
While the above analysis focuses on dividends relative to a company’s earnings, we do note Acorn International’s strong net cash position, which will let it pay larger dividends for a time, should it choose.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the last decade of data, we can see that Acorn International paid its first dividend at least nine years ago. The dividend has been quite stable over the past nine years, which is great to see – although we usually like to see the dividend maintained for a decade before giving it full marks, though. During the past nine-year period, the first annual payment was US$4.60 in 2010, compared to US$1.00 last year. This works out to a decline of approximately 78% over that time.
When a company’s per-share dividend falls we question if this reflects poorly on either external business conditions, or the company’s capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend’s purchasing power over the long term. It’s good to see Acorn International has been growing its earnings per share at 63% a year over the past five years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively.
Conclusion
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We’re glad to see Acorn International has a low payout ratio, as this suggests earnings are being reinvested in the business. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we’d like. Acorn International has a credible record on several fronts, but falls slightly short of our standards for a dividend stock.
Now, if you want to look closer, it would be worth checking out our free research on Acorn International management tenure, salary, and performance.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.